Thinking globally: Will it work for WAG?

By Jim Frederick

Is Walgreens’ decision to buy a major stake in European drug store giant Alliance Boots a good idea?

It could be — provided the combined entity, which would comprise the world’s biggest drug retailer and biggest purchaser of pharmaceuticals — successfully can leverage the unique strengths of each company, apply them to their respective markets and reap the billion dollars in synergistic savings Walgreens is predicting will occur by 2016. But for a company with no experience in European retailing and plenty of homefront headaches to deal with in mid-2012, spending $6.7 billion in cash and stock for a 45% stake in Boots is a big leap into the unknown.

Walgreens already operates drug stores in Puerto Rico and Guam. But ever since the company sold its Sanborns division in Mexico to Grupo Carso 30 years ago, its leaders have airily dismissed the notion — proposed by many retail analysts and reporters — of jumping outside the United States or its protectorates for new growth opportunities.

A succession of top company executives — from former chairman and CEO Cork Walgreen III to Fred Canning, Dan Jorndt, David Bernauer, Jeff Rein and current president and CEO Greg Wasson — traditionally have insisted there was no compelling need for the nation’s top drug chain to look beyond its own borders for growth. The rationale — that there still were too many rich veins of potential business to mine in too many cities and towns at “the corner of Main and Main” across the U.S. — made sense for a company able to open hundreds of fast-maturing new stores each year, notch more than 30 consecutive years of record profits, and reap same-store sales gains that were the envy of other retailers.

Those days are over. For Walgreens, which now competes against a slew of powerful national and local competitors with more than 7,800 pharmacies in all 50 states, much of the low-hanging expansion fruit has been picked, either by Walgreens or by its rivals. More pressing for the company is its costly divorce from pharmacy benefit management giant Express Scripts, many of whose millions of plan members are now getting their prescriptions filled elsewhere after the two companies failed to come to terms over reimbursement rates.

Add to that the still-tepid economic recovery and the serious challenge posed by its biggest rivals, CVS Caremark, Walmart and Rite Aid, all of which are making hay over the January termination of the Walgreens-Express Scripts contract by aggressively courting the drug store chain’s customers, and it’s perhaps no surprise that Walgreens’ leaders are thinking globally.

Wall Street investors clearly didn’t like the idea of a Walgreens-Alliance Boots merger, as seen by WAG’s falling stock price early last week. But don’t count the big guy out. Walgreens has more than a century of experience riding out tough economic times and competitive challenges. And it has plenty of weapons in its arsenal, with or without the addition of Boots: A rock-solid balance sheet, cash to invest, seasoned leadership, powerful economies of scale and a strategic determination to put its retail and specialty pharmacies, health clinics and employer-based health centers at the epicenter of a new, fully integrated healthcare system.

What do our readers think? Was WAG’s deal with Boots a bold and farsighted move to stake out a bigger piece of the world market for health, personal care and beauty products and services in the era of globalization, or a sign of desperation in the face of a challenging domestic market? We’d like to hear your views.